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Tough road ahead
We downgrade CEAT from ‘Accumulate’ to ‘Hold’ owing to concerns regarding volume growth as well as margins. CEAT’s Q4FY19 consolidated operating margins stood at 9.2%, down by 250bps YoY / up by 100bps QoQmissed our expectations of 10.5%. Volumes for the quarter have also seen a YoY dip both in OEM and replacement segments, while exports saw a decent growth over Q4FY19. To add to the woes of lower production volumes from OEMs, replacement demand witnessed a weakness and growth concerns for the tyre industry in the medium term continued to prevail. Given CEAT’s upcoming new capacities for the TBR, PCR and 2W segments over the current fiscal (TBR capacity commissioned in Jan’19) along with anticipated rise in raw material costs (with crude prices and international rubber prices moving up, domestic rubber production to slowdown), margins too are expected to remain under pressure over FY20/21E. Hence we taper our margin expectations for FY20/21E by 50/40bps at 9.3/9.6% respectively and downgrade to ‘Hold’ with a target price of Rs1,100 based on 15x Mar’21E consolidated EPS. The stock is currently trading at 15.4x FY20E & 14.4x FY21E consol EPS.
Consolidated revenue / Adj. PAT in-line, OPM misses estimates:
Consolidated sales growth for the quarter was at 4.4% YoY (up ~2% QoQ) to Rs17.6bn (PLe: Rs17.4bn). EBITDA margin came in at 9.2% (PLe: 10.5%), lower 250bps YoY / up 100bps QoQ. Absolute EBITDA declined ~18% YoY to Rs1.6bn. With average rubber prices for the quarter at ~125/kg, gross margins were down 80bps YoY / 220bps QoQ, (wherein QoQ, the impact of price cut is ~52bps and the balance is on account of higher finished goods inventory at the end of Q3FY19). Staff costs as well as other expenses as percentage of sales were up 30bps YoY (down 90bps) & 120bps YoY (down 220bps QoQ) respectively. Share of profit from associate was lower 38% YoY / 48% QoQ at Rs33mn. With a significantly higher other income (at Rs306mn, including Rs250mn one-off) as well as lower tax rate (at 18.3% v/s 35.7% in Q4FY18 & 39.7% in Q3FY19), reported profit was at Rs643mn. Adjusting for the exceptional items (expense towards VRS/differential amount for GST amounting to Rs405mn & one-off other income amounting to Rs250mn), net profit for the quarter stood at Rs717mn, down 24% YoY (in-line with PLe: Rs714mn).
Key takeaways from the conference call:
1) Revenue for the quarter was up ~4% YoY on account of ~6% YoY rise in realisations while volumes de-grew 1-2% YoY with dip in the QEM and replacement segment, while exports registered a decent growth. 2) However, QoQ realisations were lower ~1% owing to price cut taken by the company. 3) Management slightly revised capex guidance for FY20 to Rs13- 14bn plus additional Rs2bn for Specialty tyres. 4) Commodity costs for Q1FY20 are expected to be ~Q4FY19 levels and seem to be robust going ahead for full year FY20. 5) The Halol plant for TBR commissioned in Jan’19 was to be ramped-up to 5-8Ktyres/month initially. Full ramp-up (peak capacity – 80Ktyres/month) is expected in 1-1.5 years. 6) PCR capacity to come on-stream by Q3FY20 which is expected to be fully utilized in first 6Ms on the back of OEM orders; to be ramped up to full capacity of 30K tyres in 2-3 years. 7) 2W capacity expansion also to come on-stream in 2-3 months. However, utilisation here looks challenging.
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